The Bank of England (BoE) recently published some dovish guidance with respect to future interest rate increases. This means that they are likely to adjust their outlook for monetary policy. To the UK, where inflation rates are finally starting to drop. Perhaps as a consequence, the Bank of England has shifted back its forecast for the first interest rate cut from November to February. This shift reinforces the idea that the central bank is closely watching economic data, especially as it relates to inflationary pressures.
As it stands now, the BoE expects interest rates to average 3.5% during the second half of 2025. This forecast is in keeping with broad market expectations that rates will start to come down as soon as this January. The late-November Autumn Budget will be key in setting out the Chancellor’s hand on these projections. It might have a bearing on the pace of future interest rate increases.
UK inflation has indeed been especially running half a percentage point below the Bank’s forecasts dating back to August. With large declines across the core commodities, this decline has most notably been pronounced in food prices, as noted by a whopping September cut. The annual rate of food inflation finally dropped below 5%, a welcome development for consumers and policymakers in advanced economies. Underlying this concern is what officials at the BoE say is extremely high food inflation. Recent tax increases and minimum wage hikes, which went into effect in April, have compounded the crisis.
Curiously, those tax increases are not reflected in their 2026 headline inflation. That’s a big departure from years past. This positive development reflects the growing economic reality of our changing times. As a result, analysts are reconsidering what to expect from inflation and how that should impact monetary policy. Services inflation is now 0.3 percentage points lower than predicted in the August forecasts. Not only that, the annual rate of services inflation dropped once more in September.
In September, multiple indicators of inflation for “core services”—an inflation measure that removes volatile categories like food and energy—fell. This drop fuels hope that inflationary pressures are continuing to moderate. This creates the opportunity for the Bank of England to be more flexible and even-handed in its interest rate policy. Markets aren’t complacent — they’re reacting to all of these new developments, and markets are now pricing a 72% chance of an interest rate cut this coming December.
As the economy continues to adjust to these changing circumstances, the Bank of England will continue to monitor inflation closely. The Autumn Budget is due to provide more clues about the shape of fiscal policy. The lessons learned will be extraordinarily relevant to the future of our economic vitality and sustainability. Policymakers need to be mindful of all three sets. Their decisions on whether to raise or lower interest rates will be based on changing economic indicators.